Simpson Mining is obligated to restore leased land to its original condition after its excavation activities are over in three years. The cash flow possibilities and probabilities for the restoration costs in three years are as follows: The company's credit-adjusted risk-free interest rate is 5%. The liability that Simpson must record at the beginning of the project for the restoration costs is:
A)$ 129,576.
B)$ 145,000.
C)$ 125,257.
D)$ 172,768.

Question

Quizplus · Accepted Answer

We can calculate the present value of the restoration costs using the following formula:
PV = FV / (1 + r)^n
Where PV is the present value, FV is the future value (restoration costs), r is the credit-adjusted risk-free interest rate, and n is the number of years until the restoration costs are due.

Using the probabilities and cash flows provided, we can calculate the expected future value of the restoration costs:
Expected Future Value = (0.4 x 200,000) + (0.5 x 150,000) + (0.1 x 100,000) = 165,000

Using the formula above, we can calculate the present value of the restoration costs:
PV = 165,000 / (1 + 0.05)^3 = $125,257.43

Therefore, the liability that Simpson must record at the beginning of the project for the restoration costs is $125,257. Answer choice C is correct.

Simpson Mining Is Obligated to Restore Leased Land to Its